Would you renew this property loan?
A US industrial property has a $15m interest-only loan up for renewal at 8%. Annual net operating income is $1.8m. A tenant vacancy could reduce annual income to $1.35m. The fictional renewal requires at least 1.25× downside interest coverage and at most 70% stressed loan-to-value. A stressed appraisal values the property at $18m.
“Sector selection, scale of company, seniority of capital.” (opens the source)
The question
All figures are in USD millions. This is a fictional US loan.
“Make a renewal decision and identify the requirement that limits the loan.”
Not saved by this site. Your browser may restore text when you navigate back.
A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Check cash service
What would you do here? Open the move you’d make.
Divide property value by interest
Tempting, but it misses something. Value measures collateral support. It does not measure annual cash service.
Divide stressed property income by annual interest
The strong move. The downside fails the renewal coverage screen.
See how a strong candidate says it
“At $15m, annual interest is $1.2m. Coverage is 1.50× in the base case and 1.125× in the downside.”
Why it works: The downside fails the renewal coverage screen.
Step 2: Check collateral support
What would you do here? Open the move you’d make.
Divide outstanding principal by stressed value
The strong move. The second test limits exposure to a fall in property value.
Treat appraised value as sale proceeds
Tempting, but it misses something. A sale can bring a different price and incur costs.
See how a strong candidate says it
“Stressed loan-to-value is $15m ÷ $18m = 83.33%. The 70% limit caps debt at $12.6m.”
Why it works: The second test limits exposure to a fall in property value.
Step 3: Revise the loan size
What would you do here? Open the move you’d make.
Renew at the coverage cap of $13.5m
Tempting, but it misses something. At $13.5m, stressed loan-to-value is 75%.
Consider renewal after a $2.4m funded paydown
The strong move. The lower of the two caps determines the largest eligible balance.
See how a strong candidate says it
“At $12.6m, annual interest is $1.008m. Downside coverage is about 1.34× and stressed loan-to-value is exactly 70%.”
Why it works: The lower of the two caps determines the largest eligible balance.
Step 4: Defend the renewal
What would you do here? Open the move you’d make.
Check the tenant plan and the value sensitivity
The strong move. A small change in value can remove all room under the limit.
Assume the property will refinance at maturity
Tempting, but it misses something. Interest-only debt leaves the full balance outstanding at maturity.
See how a strong candidate says it
“I would consider a smaller renewal if the paydown is funded and the appraisal and leasing plan support it. At a $17m stressed value, the loan-to-value cap falls to $11.9m.”
Why it works: A small change in value can remove all room under the limit.
The answer, in short
- Decision
- Decline a $15m renewal. Consider $12.6m or less.
- Because
- The requested balance fails both stressed tests.
- What would change it
- A funded paydown and verified downside assumptions could support a smaller renewal.
Reset to $15m. What if the stressed appraisal falls to $17m?
Common traps
- Presenting the stressed appraisal as the lender’s expected recovery.
Check your answer
- I used annual property income for coverage.
- I calculated both loan caps.
- I selected the tighter cap.
- I stated the maturity and appraisal risks.
Last reviewed Nov 10, 2026